Definition of Contribution in Aid ofConstruction Under Section 118(c)

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8936] RIN 1545-
AW17
TITLE: Definition of Contribution in Aid of Construction Under
Section 118(c)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations concerning an
exclusion from gross income for a contribution in aid of
construction under section 118(c) that is treated as a contribution
to capital under section 118(a). The final regulations affect a
regulated public utility that provides water or sewerage services
because a qualifying contribution in aid of construction is treated
as a contribution to the capital of the utility and excluded from
gross income. The final regulations provide guidance on the
definition of a contribution in aid of construction, the adjusted
basis of any property acquired with a contribution in aid of
construction, the information relating to a contribution in aid of
construction required to be furnished by the utility, and the time
and manner for providing that information to the IRS.
DATES: Effective Date: These regulations are effective January 11,
2001. Date of Applicability: For date of applicability of
§1.118-2, see §1.118-2(f).
FOR FURTHER INFORMATION CONTACT: Paul Handleman, (202) 622-3040 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507) under control number 1545-1639. Responses to these
collections of information are mandatory. An agency may not conduct
or sponsor, and a person is not required to respond to, a collection
of information unless the collection of information displays a valid
control number.
The estimated annual burden per respondent varies from .5 hour to 5
hours, depending on individual circumstances, with an estimated
average of 1 hour. Comments concerning the accuracy of these burden
estimates and suggestions for reducing these burdens should be sent
to the Internal Revenue Service , Attn: IRS Reports Clearance
Officer, W:CAR:MP:FP:S:O, Washington, DC 20224, and to the Office of
Management and Budget , Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington,
DC 20503. Books or records relating to this collection of
information must be retained as long as their contents may become
material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.
Background
On December 20, 1999, the IRS published proposed regulations
(REG-106012-98) in the Federal Register (64 FR 71082) inviting
comments under section 118(c). A public hearing was held April 27,
2000. Numerous comments have been received. After consideration of
all the comments, the proposed regulations are adopted as revised by
this Treasury decision.
Summary of Comments
Under section 118(a), gross income does not include any contribution
to the capital of the taxpayer. Section 118(c)(1) provides that a
contribution to the capital of a taxpayer includes any amount of
money or other property received from any person (whether or not a
shareholder) by a regulated public utility that provides water or
sewerage disposal services if the amount is a contribution in aid of
construction, satisfies the expenditure rule, and is not included in
rate base for ratemaking purposes. Pursuant to the authority granted
to the Secretary under section 118(c)(3)(A), the proposed
regulations define a contribution in aid of construction as any
amount of money or other property contributed to a regulated public
utility that provides water or sewerage disposal services to the
extent that the purpose of the contribution is to provide for the
expansion, improvement, or replacement of the utility's water or
sewerage disposal facilities.
Customer Connection Fees
The proposed regulations define nontaxable contributions in aid of
construction to exclude customer connection fees. Customer
connection fees are defined in the. proposed regulations to include
amounts paid for the cost of installing a connection or service line
(including the cost of meters and piping) from the utility's main
lines to the lines owned by the customer, unless the connection or
service line serves, or is designed to serve, more than one
customer. Customer connection fees also are defined in the proposed
regulations to include any amounts paid as service charges for
starting or stopping services.
Several commentators contend that connection and service lines
should not be treated as taxable customer connection fees for a
number of reasons. For example, these commentators argue that the
omission from the current law of the language included in former
section 118(b)(3)(A) that directed the Secretary to define a
contribution in aid of construction to exclude amounts paid to
connect the customer's line to a main water or sewer line signals
congressional intent to include connection and service lines in the
definition of a nontaxable contribution in aid of construction. In
addition, some of these commentators believe that the inclusion of
connection and service lines as taxable customer connection fees is
inconsistent with the judicial interpretation of a contribution in
aid of construction, which arguably would treat contributions for
main lines and connection and service lines as taxable prerequisites
for services under the Supreme Court's decision in United States v.
Chicago, Burlington & Quincy R.R., 412 U.S. 401 (1973) (1973-2 C.B.
428). Some of these commentators also contend that the exclusion of
connection and service lines from the definition of a nontaxable
contribution in aid of construction is inconsistent with regulatory
accounting treatment, which does not distinguish between main lines
and. connection and service lines for purposes of classifying
property or for purposes of ratemaking. Finally, a few of these
commentators point out that the inclusion of connection and service
lines as taxable customer connection fees will result in customers
being required to gross-up their contributions of connection and
service lines for taxes, increasing the cost of housing and
development and creating a competitive disadvantage for investor-
owned utilities.
The IRS and Treasury Department do not agree with the commentators'
position with respect to connection and service lines. As explained
in the preamble to the proposed regulations, the inclusion of
connection and service lines in the definition of taxable customer
connection fees is consistent with the legislative history
explanation that section 118(c) was intended to restore the
contribution in aid of construction provision of former section
118(b) that was repealed by The Tax Reform Act of 1986 for regulated
public utilities that provide water or sewerage disposal services.
H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess. 316 (1996) (1996-3
C.B. 741, 1056). While the language regarding the definition of a
contribution in aid of construction did change from the language in
former section 118(b), Congress did not explicitly include
connection and service lines in the definition of a contribution in
aid of construction but instead directed the Secretary to define a
contribution in aid of construction, presumably aware of the IRS'
and Treasury Department's position that connection and service lines
are taxable customer connection fees based on Rev. Rul. 75-557
(1975-2 C.B. 33), and the proposed regulations under former section
118(b) (43 FR 22997 (May 30, 1978)). Moreover, the IRS and Treasury
Department continue to believe that. the exclusion of connection and
service lines from a nontaxable contribution in aid of construction
is more consistent with the judicial and regulatory interpretation
of a contribution in aid of construction and with the Supreme
Court's directive that exclusions be narrowly construed. See, for
example, Edwards v. Cuba R.R., 268 U.S. 628 (1925) (IV-2 C.B. 122);
Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943) (1943 C.B.
1019); Chicago, Burlington & Quincy R.R., 412 U.S. at 401; Florida
Progress Corp. v. United States, No. 93-246-CIV-T-25A (M.D. Fla.
July 2, 1998), appeal docketed, No. 99-15389-FF (11th Cir. Dec. 29,
1999); Commissioner v. Schleier, 515 U.S. 323, 328 (1995); and Rev.
Rul. 75-557. As explained by the court in Teco Energy, Inc. v.
Unites States, No. 98-430-Civ-J-TJC (M.D. Fla. Oct. 21, 1999),
"former [section] 118(b) codifies the principles of Edwards that
payments made by a government or other group to a utility to
encourage the extension of facilities into new areas benefitting a
large number of people are given tax free status, while also
affirming the reasoning of Detroit Edison and Revenue Ruling 75-557,
that payments made by an individual or business entity to a utility
as a prerequisite to receiving water or sewage services would be
treated as taxable income to the utility." Further, the IRS and
Treasury Department believe that the definition of a contribution in
aid of construction used for regulatory accounting purposes should
not control for tax purposes. See, for example, Thor Power Tool Co.
v. Commissioner, 439 U.S. 522, 541-45 (1979) (1979-1 C.B. 167).
Accordingly, the final regulations retain the exclusion of
connection and service lines from the definition of a nontaxable
contribution in aid of construction.
Some commentators state that, before the proposed regulations were
published, some utilities took the position that payments for
connection and service lines were not taxable and did not charge
their contributors a sufficient amount to cover their tax
liabilities. The IRS and Treasury Department understand that there
was uncertainty before the proposed regulations were published and
that some utilities may have reasonably interpreted section 118(c)
(3)(A) to mean that connection and service lines should not be
treated as taxable. It is clear that these final regulations apply
to money and other property received on or after January 11, 2001,
and do not apply to transactions entered into prior to that date. In
addition, the IRS will take into account all the facts and
circumstances in applying section 118(c) to such transactions.
Commentators suggest that customer connection fees relating to
services provided to public authorities, such as schools, hospitals,
public libraries, and governmental entities, should be included in
the definition of nontaxable contributions in aid of construction
because these services provide a broad public benefit. In addition,
commentators recommend that customer connection fees relating to
fire protection services should qualify as nontaxable contributions
in aid of construction because a utility receives no revenue for
public fire protection services and only a nominal standby fee for
private fire protection services. The IRS and Treasury Department
believe that, regardless of whether the activities of public
authorities provide a public benefit, connection and service lines
that serve these customers should be treated in the same manner as
connection or service lines to any paying customer -- as a
prerequisite for services. Consequently, the final regulations
continue. to treat amounts paid for connection and service lines
with respect to public authorities as customer connection fees.
However, the IRS and the Treasury Department agree with commentators
that amounts paid with respect to fire protection services should
not be considered customer connection fees.
Several commentators suggest that connection and service lines that
serve more than one user, such as lines for apartment houses,
condominium projects, shopping malls, and office buildings, should
be considered to serve more than one customer and, thus, be excluded
from taxable customer connection fees, regardless of whether the
utility treats the facility as one customer or many. The final
regulations do not adopt this suggestion because whether connection
or service lines are designed to serve more than one customer does
not depend on the number of users but upon the number of customers.
Thus, for example, if a water or sewerage disposal utility treats an
apartment or office building as one utility customer, then the cost
of connecting the utility's main lines to the connection or service
lines serving that single customer is a taxable customer connection
fee.
Binding Agreement Rule
The proposed regulations provide that if a water or sewerage
disposal facility is placed in service by the utility before an
amount is contributed to the utility, the contribution is not a
nontaxable contribution in aid of construction unless, at the time
the facility is placed in service by the utility, there is an
agreement, binding under local law between the prospective
contributor and the utility, that the utility is to receive the
amount as reimbursement for the cost of acquiring or constructing
the facility. Commentators suggest that the binding agreement rule
should be expanded to include enforceable public utility commission
orders and tariffs. The final regulations adopt this suggestion by
treating an order or a tariff, issued or approved by the applicable
public utility commission, that requires a current or prospective
customer to reimburse the utility for the cost of acquiring or
constructing the facility as a binding agreement. Because public
utility commission orders or tariffs may be issued or approved
before or after the facility is placed in service, the final
regulations also extend the time for entering into a binding
agreement or the issuance or approval of an order or a tariff to no
later than 8½ months after the close of the taxable year (the
usual due date with extensions for a taxpayer's return) in which the
facility is placed in service.
One commentator suggests adding an example demonstrating that
payments made pursuant to a binding agreement qualify as a
contribution in aid of construction under section 118(c). The final
regulations adopt this suggestion.
Basis Rules
The proposed regulations provide that the basis of a water or
sewerage facility acquired or constructed with a contribution under
a binding agreement must be reduced by the amount of the
contribution at the time the facility is placed in service. Several
commentators suggest that if the receipt of all of the expected
contributions under the agreement occurs more than one or two years
after a facility is placed in service, the utility should be
permitted to claim the full cost of the facility as basis for
depreciation purposes, subject to adjustment as the contributions
are received. The. final regulations do not adopt this comment
because section 118(c)(4) disallows any depreciation deductions for
a water or sewerage disposal facility that is fully paid with a
nontaxable contribution in aid of construction under section under
section 118(c). This result is consistent with similar rules that
either exclude expected contributions from basis or deny a deduction
to the extent the taxpayer has a right to, or reasonable prospect
of, reimbursement. See, for example, §1.110-1(b)(4)(ii)(B);
§1.165-1(d)(2)(i); and Rev. Rul. 79-263 (1979-2 C.B. 82).
The proposed regulations provide that, if a contribution in aid of
construction treated as a contribution to the capital of the
taxpayer is repaid to the contributor, either in whole or in part,
then the repayment amount is a capital expenditure in the taxable
year in which it is paid or incurred, resulting in an increase in
the property's adjusted basis in such year. A couple of commentators
suggest that the repayment should be depreciated over the remaining
life of the property. The final regulations adopt this suggestion.
Reporting Requirement
The proposed regulations provide that a taxpayer treating a
contribution in aid of construction as a contribution to capital
must file a statement with its tax returns to report the amount of
the contribution in aid of construction the taxpayer: (1) expended
during the taxable year for property described in section 118(c)(2)
(A) (qualified property); (2) does not intend to expend for
qualified property; and (3) failed to expend for qualified property.
Several commentators express concern that the reporting requirement
in the proposed regulations exceeds the intent of the statute
because.
section 118(c)(2)(C) only requires the maintenance of adequate
records. However, section 118(d)(1) provides that if the taxpayer
for any taxable year treats an amount as a contribution to the
capital of the taxpayer described in section 118(c), then the
statutory period for the assessment of any deficiency attributable
to any part of the amount does not expire before the expiration of 3
years from the date the Secretary is notified by the taxpayer (in
such manner as the Secretary may prescribe) of the amount of the
expenditure referred to in section 118(c)(2)(A), of the taxpayer's
intention not to make the expenditures referred to in section 118(c)
(2)(A), or of a failure to make the expenditure within the period
described in section 118(c)(2)(B). Thus, the regulations do not
impose an additional reporting requirement but merely provide the
time and manner in which taxpayers must notify the Secretary under
section 118(d)(1) of amounts treated as contributions in aid of
construction.
Collection of Information under Paperwork Reduction Act
Two comments were sent to OMB on the collection of information
contained in the proposed regulations, with copies of the comments
sent to the IRS Reports Clearance Officer. The commentators estimate
that complying with the recordkeeping requirements of section 118(c)
(2)(C) involves more hours and that the number of respondents is
greater than estimated. The collection of information burden under
the proposed regulations is based only upon the time for notifying
the IRS of the required information under section 118(d)(1) and is
not required to include the time for maintaining accurate books and
records. Thus, the individual time to comply with the collection of
information burden was not increased to reflect these commentators.
concerns. However, the estimated number of annual respondents has
been increased to 300 and the estimated total annual reporting
burden has been increased to 300 hours.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is
hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based
upon the fact that any burden on taxpayers is minimal. Accordingly,
a Regulatory Flexibility Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required. Pursuant to section
7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Paul F. Handleman,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects
26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 602 Reporting and recordkeeping requirements. Amendments
to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.118-2 also issued under 26 U.S.C. 118(c)(3)(A); * * * Par.
2. Section 1.118-2 is added to read as follows: §1.118-2
Contribution in aid of construction.
(a) Special rule for water and sewerage disposal utilities--
(1) In general. For purposes of section 118, the term contribution
to the capital of the taxpayer includes any amount of money or other
property received from any person (whether or not a shareholder) by
a regulated public utility that provides water or sewerage disposal
services if--
(i) The amount is a contribution in aid of construction under
paragraph (b) of this section;
(ii) In the case of a contribution of property other than water or
sewerage disposal facilities, the amount satisfies the expenditure
rule under paragraph (c) of this section; and
(iii) The amount (or any property acquired or constructed with the
amount) is not included in the taxpayer's rate base for ratemaking
purposes.
(2) Definitions--
(i) Regulated public utility has the meaning given such term by
section 7701(a)(33), except that such term does not include any
utility which is not required to provide water or sewerage disposal
services to members of the general public in its service area.
(ii) Water or sewerage disposal facility is defined as tangible
property described in section 1231(b) that is used predominately
(80% or more) in the trade or business of furnishing water or
sewerage disposal services.
(b) Contribution in aid of construction--
(1) In general. For purposes of section 118(c) and this section, the
term contribution in aid of construction means any amount of money
or other property contributed to a regulated public utility that
provides water or sewerage disposal services to the extent that the
purpose of the contribution is to provide for the expansion,
improvement, or replacement of the utility's water or sewerage
disposal facilities.
(2) Advances. A contribution in aid of construction may include an
amount of money or other property contributed to a regulated public
utility for a water or sewerage disposal facility subject to a
contingent obligation to repay the amount, in whole or in part, to
the contributor (commonly referred to as an advance). For example,
an amount received by a utility from a developer to construct a
water facility pursuant to an agreement under which the utility will
pay the developer a percentage of the receipts from the facility
over a fixed period may constitute a contribution in aid of
construction.. Whether an advance is a contribution or a loan is
determined under general principles of federal tax law based on all
the facts and circumstances. For the treatment of any amount of a
contribution in aid of construction that is repaid by the utility to
the contributor, see paragraphs (c)(2)(ii) and (d)(2) of this
section.
(3) Customer connection fee--
(i) In general. Except as provided in paragraph (b)(3)(ii) of this
section, a customer connection fee is not a contribution in aid of
construction under this paragraph (b) and generally is includible in
income. The term customer connection fee includes any amount of
money or other property transferred to the utility representing the
cost of installing a connection or service line (including the cost
of meters and piping) from the utility's main water or sewer lines
to the line owned by the customer or potential customer. A customer
connection fee also includes any amount paid as a service charge for
starting or stopping service.
(ii) Exceptions--(A) Multiple customers. Money or other property
contributed for a connection or service line from the utility's main
line to the customer's or the potential customer's line is not a
customer connection fee if the connection or service line serves, or
is designed to serve, more than one customer. For example, a
contribution for a split service line that is designed to serve two
customers is not a customer connection fee. On the other hand, if a
water or sewerage disposal utility treats an apartment or office
building as one utility customer, then the cost of installing a
connection or service line from the utility's main water or sewer
lines serving that single customer is a customer connection fee. (B)
Fire protection services. Money or other property contributed for
public and private fire protection services is not a customer
connection fee.
(4) Reimbursement for a facility previously placed in service--
(i) In general. If a water or sewerage disposal facility is placed
in service by the utility before an amount is contributed to the
utility, the contribution is not a contribution in aid of
construction under this paragraph (b) with respect to the cost of
the facility unless, no later than 8½ months after the close
of the taxable year in which the facility was placed in service,
there is an agreement, binding under local law, that the utility is
to receive the amount as reimbursement for the cost of acquiring or
constructing the facility. An order or tariff, binding under local
law, that is issued or approved by the applicable public utility
commission requiring current or prospective utility customers to
reimburse the utility for the cost of acquiring or constructing the
facility, is a binding agreement for purposes of the preceding
sentence. If an agreement exists, the basis of the facility must be
reduced by the amount of the expected contributions. Appropriate
adjustments must be made if actual contributions differ from
expected contributions.
(ii) Example. The application of paragraph (b)(4)(i) of this section
is illustrated by the following example: Example. M, a calendar year
regulated public utility that provides water services, spent
$1,000,000 for the construction of a water facility that can serve
200 customers. M placed the facility in service in 2000. In June
2001, the public utility commission that regulates M approves a
tariff requiring new customers to reimburse M for the cost of
constructing the facility by paying a service availability charge of
$5,000 per lot. Pursuant to the tariff, M expects to receive
reimbursements for the cost of the facility of $100,000 per year for
the years 2001 through 2010. The reimbursements are contributions in
aid of construction under paragraph (b) of this section because no
later than 8½ months after the close of the taxable year in
which the facility was placed in. service there was a tariff,
binding under local law, approved by the public utility commission
requiring new customers to reimburse the utility for the cost of
constructing the facility. The basis of the $1,000,000 facility is
zero because the expected contributions equal the cost of the
facility.
(5) Classification by ratemaking authority. The fact that the
applicable ratemaking authority classifies any money or other
property received by a utility as a contribution in aid of
construction is not conclusive as to its treatment under this
paragraph (b).
(c) Expenditure rule--
(1) In general. An amount satisfies the expenditure rule of section
118(c)(2) if the amount is expended for the acquisition or
construction of property described in section 118(c)(2)(A), the
amount is paid or incurred before the end of the second taxable year
after the taxable year in which the amount was received as required
by section 118(c)(2)(B), and accurate records are kept of
contributions and expenditures as provided in section 118(c)(2)(C).
(2) Excess amount--
(i) Includible in the utility's income. An amount received by a
utility as a contribution in aid of construction that is not
expended for the acquisition or construction of water or sewerage
disposal facilities as required by paragraph (c)(1) of this section
(the excess amount) is not a contribution to the capital of the
taxpayer under paragraph (a) of this section. Except as provided in
paragraph (c)(2)(ii) of this section, such excess amount is
includible in the utility's income in the taxable year in which the
amount was received.
(ii) Repayment of excess amount. If the excess amount described in
paragraph (c)(2)(i) of this section is repaid, in whole or in part,
either--
(A) Before the end of the time period described in paragraph (c)(1)
of this section, the repayment amount is not includible in the
utility's income; or
(B) After the end of the time period described in paragraph (c)(1)
of this section, the repayment amount may be deducted by the utility
in the taxable year in which it is paid or incurred to the extent
such amount was included in income.
(3) Example. The application of this paragraph (c) is illustrated by
the following example: Example. M, a calendar year regulated public
utility that provides water services, received a $1,000,000
contribution in aid of construction in 2000 for the purpose of
constructing a water facility. To the extent that the $1,000,000
exceeded the actual cost of the facility, the contribution was
subject to being returned. In 2001, M built the facility at a cost
of $700,000 and returned $200,000 to the contributor. As of the end
of 2002, M had not returned the remaining $100,000. Assuming
accurate records are kept, the requirement under section 118(c)(2)
is satisfied for $700,000 of the contribution. Because $200,000 of
the contribution was returned within the time period during which
qualifying expenditures could be made, this amount is not includible
in M's income. However, the remaining $100,000 is includible in M's
income for its 2000 taxable year (the taxable year in which the
amount was received) because the amount was neither spent nor repaid
during the prescribed time period. To the extent M repays the
remaining $100,000 after year 2002, M would be entitled to a
deduction in the year such repayment is paid or incurred.
(d) Adjusted basis--(1) Exclusion from basis. Except for a repayment
described in paragraph (d)(2) of this section, to the extent that a
water or sewerage disposal facility is acquired or constructed with
an amount received as a contribution to the capital of the taxpayer
under paragraph (a) of this section, the basis of the facility is
reduced by the amount of the contribution. To the extent the water
or sewerage disposal facility is acquired as a contribution to the
capital of the taxpayer under paragraph (a) of this section, the
basis of the contributed facility is zero..
(2) Repayment of contribution. If a contribution to the capital of
the taxpayer under paragraph (a) of this section is repaid to the
contributor, either in whole or in part, then the repayment amount
is a capital expenditure in the taxable year in which it is paid or
incurred, resulting in an increase in the property's adjusted basis
in such year. Capital expenditures allocated to depreciable property
under paragraph (d)(3) of this section may be depreciated over the
remaining recovery period for that property.
(3) Allocation of contributions. An amount treated as a capital
expenditure under this paragraph (d) is to be allocated
proportionately to the adjusted basis of each property acquired or
constructed with the contribution based on the relative cost of such
property.
(4) Example. The application of this paragraph (d) is illustrated by
the following example: Example. A, a calendar year regulated public
utility that provides water services, received a $1,000,000
contribution in aid of construction in 2000 as an advance from B, a
developer, for the purpose of constructing a water facility. To the
extent that the $1,000,000 exceeds the actual cost of the facility,
the contribution is subject to being returned. Under the terms of
the advance, A agrees to pay to B a percentage of the receipts from
the facility over a fixed period, but limited to the cost of the
facility. In 2001, A builds the facility at a cost of $700,000 and
returns $300,000 to B. In 2002, A pays $20,000 to B out of the
receipts from the facility. Assuming accurate records are kept, the
$700,000 advance is a contribution to the capital of A under
paragraph (a) of this section and is excludable from A's income. The
basis of the $700,000 facility constructed with this contribution to
capital is zero. The $300,000 excess amount is not a contribution to
the capital of A under paragraph (a) of this section because it does
not meet the expenditure rule described in paragraph (c)(1) of this
section. However, this excess amount is not includible in A's income
pursuant to paragraph (c)(2)(ii) of this section since the amount is
repaid to B within the required time period. The repayment of the
$300,000 excess amount to B in 2001 is not treated as a capital
expenditure by A. The $20,000 payment to B in 2002 is treated as a
capital expenditure by A in 2002 resulting in an increase in the
adjusted basis of the water facility from zero to $20,000.
(e) Statute of limitations--(1) Extension of statute of limitations.
Under section 118(d)(1), the statutory period for assessment of any
deficiency attributable to a contribution to capital under paragraph
(a) of this section does not expire before the expiration of 3 years
after the date the taxpayer notifies the Secretary in the time and
manner prescribed in paragraph (e)(2) of this section.
(2) Time and manner of notification. Notification is made by
attaching a statement to the taxpayer's federal income tax return
for the taxable year in which any of the reportable items in
paragraphs (e)(2)(i) through (iii) of this section occur. The
statement must contain the taxpayer's name, address, employer
identification number, taxable year, and the following information
with respect to contributions of property other than water or
sewerage disposal facilities that are subject to the expenditure
rule described in paragraph (c) of this section--
(i) The amount of contributions in aid of construction expended
during the taxable year for property described in section 118(c)(2)
(A) (qualified property) as required under paragraph (c)(1) of this
section, identified by taxable year in which the contributions were
received;
(ii) The amount of contributions in aid of construction that the
taxpayer does not intend to expend for qualified property as
required under paragraph (c)(1) of this section, identified by
taxable year in which the contributions were received; and
(iii) The amount of contributions in aid of construction that the
taxpayer failed to expend for qualified property as required under
paragraph (c)(1) of this section, identified by taxable year in
which the contributions were received.
(f) Effective date. This section is applicable for any money or
other property received by a regulated public utility that provides
water or sewerage disposal services on or after January 11, 2001.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (b) is amended by adding an
entry to the table in numerical order to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
_____________________________________________________________________
CFR part or section Current OMB
identified and described control No.
* * * * *
1.118-2 ....................................................1545-1639
* * * * *
_____________________________________________________________________
Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: December 20, 2000
Jonathan Talisman
Acting Assistant Secretary of the Treasury

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.